10 Reasons to Review Your Distribution Network Design

After being largely ignored for many years, distribution network design has recently surged to the top of the priority list for many supply chain leaders. Still, the addition, removal, or relocation of supply points in a distribution network is no small undertaking, so until something actually breaks, necessitating a change, some prefer to maintain the status quo.

However, time spent shoring up a struggling network is time on the side of your competitors, so instead of waiting on fate, I recommend keeping a weather eye open for some clues and cues indicating the need for some distribution network design attention.

That’s not to say that the following signs and symptoms are harbingers of disaster, but they should certainly prompt a distribution network design review, along with a modeling exercise to check if your outbound supply chain is maintaining that all-important balance between cost and service.

Distribution network design has surged to the top of the priority list for supply chain leaders. Click To Tweet

The Signs That Should Prompt a Distribution Network Design Review

1. Your Distribution Network Has Never Been Designed

This is actually a more common scenario than might be imagined. The importance of designing distribution networks to meet service and cost objectives has only recently become widely recognised. The reality is that many networks exist as a result of evolution rather than conscious design effort.

If you or your logistics colleagues can’t pinpoint a time when your network was examined using a modeling approach, the chances are that it never happened.

If that’s the case, you have no way to be sure the network is optimised to serve your customers or your organisation in the best way possible. Once you’re aware that this is the case, every passing day from that point on, is one on which savings and service-improvement opportunities could be lying untouched on the table.

With today’s distribution network modeling technology, it’s not too hard, or too expensive to review your network design to identify weaknesses, evaluate improvement options, and determine how transformation might benefit your business.

2. Your Company Has been Involved in M&A Activity

Has your business acquired another? Or has it been acquired by or merged into another organisation? If so, it would hardly be surprising, especially if you’re involved in consumer goods distribution, a sector which has seen a spate of M&A activity over the last two to three years.

Between mid-2014 and mid-2015, for example, both retail and food industries saw global increases of greater than 100% in mergers and acquisitions. That’s a whole lot of impact on the distribution networks of the organisations involved. Integrating distribution networks is not a task to be taken lightly though, and without a thorough analysis of existing and new networks, rationalisation approaches can easily be misguided.

If your company is to be merged or to acquire a new business in the near future, the best thing you can do is seek to gather the last 12 months’ network data from both enterprises and use it to model the most effective future distribution network design. If this can’t be done prior to merger, it should certainly be considered a priority once a deal has been struck.

3. Your Company is Downsizing or Divesting

While far less common than acquisition, the divestment of a company division, product line or other corporate asset tends also to be far less straightforward, and the impacts far less foreseeable. Perhaps for example, your organisation is planning to penetrate a new market sector and is selling assets to raise the necessary capital.

Whatever the reason for divestment, if it involves the sale of assets connected with distribution, it will impact the effectiveness and balance of your distribution network design.

For instance, if you will be selling a warehouse or two, how will the customers supplied by those facilities be served? A network design study using sophisticated modeling software will help you make the best decision between say, re-routing orders through other warehouses in your network, leasing some storage space, or outsourcing some of your distribution activity.

A network design study using modeling software will help you make the best decision. Click To Tweet

4. Changes in Your Ranges

Of course the shape and size of your distribution network is subject not only to forces under the direct control of your company (like investment or divestment) but also to those placed upon it by business performance.

When your product range undergoes a change, so too do the forces that act on your distribution network. This dynamic is magnified if for example, a new addition to your range takes off in a big way, or if the bottom falls out of the market for a former best-seller, prompting a decision to cease production.

Range expansion and contraction can change the balance of your distribution network in any number of ways. A new product might become popular in rural locations, changing the dynamic of a network optimised for suburban and urban distribution. New products might have characteristics demanding different storage or transportation methods, or may stretch capacity in your existing network.

If your company is planning range expansion, or has seen significant sales growth or decline in specific SKUs, a distribution network design review will help your management team see if adjustments are necessary to realign your network accordingly.

5. Customer Acquisition or Attrition

Customers—the one and only reason you need a distribution network. More than anything else, your network must be aligned toward their needs. More than anything else, your business profitability depends on how well you serve the customer base, and more than anything else, that base is a highly variable element of your outbound supply chain.

How growth or contraction of your customer base impacts your distribution network will depend a lot on how you deliver products to market. If yours is an organisation serving the consumer, pressure changes in your network might be subtle, taking place over a long period of time.

On the other hand, if you are serving businesses, the acquisition or loss of a large customer can have an immediate and perhaps dramatic impact on the suitability of your distribution network design. To a lesser degree, so can the acquisition or loss of a number of customers over a short time-span.

It’s really not a question of “if” but rather of “when” customer growth or contraction will change affect network alignment.

A design review is therefore essential when large customers are gained or lost and for consumer-focused businesses, should be performed every few years, to ensure the network is still optimised to meet demand, ensure availability, and operate cost-effectively.

The customer is the one and only reason you need a distribution network. Click To Tweet

6. The Legal Eagle Swoops In

Regardless of business success, your enterprise and its distribution network is at the mercy of regulatory authorities. New international, national, or local legislation can unsettle your network balance at any time, and as time goes on, is increasingly likely to do so, especially given the attention paid by regulatory authorities to environmental issues.

What will happen to your route-trade distribution costs as cities increase the size of areas designated as no-go zones for commercial vehicles? How will network optimality be affected by changes in property or transport taxes?

Remember too, that even though regulatory changes may not impact your business directly, they can change the way your customers structure their businesses, which can in turn change their demands upon your outbound supply chain.

Therefore, it’s a good idea to monitor the regulatory environment in your industry and those of your customers, in order to foresee potential network impacts and assess the need for tweaking, or even transforming the design.

The Symptoms of a Misaligned Distribution Network Design

7. Increasing Costs and Shrinking Margins

In points 1 to 6, I outlined some events which might herald a change in distribution network needs. The remaining points in this post are focused on some symptoms which might indicate your network is out of alignment and that optimisation might be the key to improved supply chain health.

The first such symptom is that of operating costs and their impact on margins. Of course there could be many causes of high distribution costs, but if costs which once seemed acceptable are rising inordinately, there is most likely some dynamic at work, the origin of which could well lie in your network design

Perhaps inventory carrying costs are increasing, or transport costs are on the rise. Even though your network design may not be the cause of these increases, it might be the key to regaining control, especially if the direct causes can’t be practically addressed.

Take the time to have a network review performed and model some “what if” scenarios. You might find a network redesign to be a more viable solution than other alternatives on the table.

8. Too Much Inventory

If your company is rich in inventory and poor in cash, your distribution network might be at the root of the problem. But how much inventory is too much and how many stocked locations are too many? Inventory is always the product of service/cost trade-offs and if you know you are delivering the service your customers want, care must be taken in considering warehouse numbers and locations.

However, many distribution networks have grown up over long periods of time, during which the options available might have changed, even if service requirements have not.

As an example, imagine you have two warehouses, each serving an urban conurbation, with both sites located on the very perimeter of the areas they serve:

Perhaps those warehouses were chosen for their favourable property prices. So you close the sites and, replace them with one larger facility, further inside one of the conurbations, but close to a trunk route linking it with the other urban area.

As a result, you achieve the same service levels without a significant increase in transport cost. Most importantly, you eliminate a stock location and therefore reduce overall inventory holdings (by holding safety stock in just one location, instead of two).

Although a hypothetical situation, this is exactly the kind of solution that might be revealed by an analytical network review.

If your company is experiencing high inventory costs, a reduction in the number of branches or warehouses is likely to make the greatest difference, compared to other solutions. A distribution network analysis will help you to see if you can make such a reduction without impacting service/availability or introducing excessive transport costs.

Reducing the number of warehouses makes a great difference in cutting high inventory costs. Click To Tweet

9. Falling Levels of Customer Service

Customer satisfaction and DIFOT service levels are good indicators of distribution network effectiveness. If your logistics operation begins to see increases in late deliveries, order-fill failures and backorders, it could easily be a sign that your distribution network is buckling under the strain of business growth.

If your network is no longer adequate, your supply chain will experience problems on two fronts. While service declines, jeopardising customer loyalty, your inventory and transport costs will likely increase, due to a rise in expedited deliveries, rework, and panic-stricken inventory management.

This is obviously not a tenable scenario, so when your supply chain measurement processes indicate a decline in customer service, a judicious approach would be to sense-check the optimality of your distribution network. Network modeling will help you evaluate the opportunities to improve both service and cost—before your business outgrows its ability to grow.

10. Network Inflexibility

As distribution channels become ever more complex, especially on the rising tide of eCommerce, the idea of a distribution network as a static design becomes less workable. Right now, perhaps only a handful of leading organisations are focusing on network flexibility, but as time goes on, more companies will necessarily look to build more agile, adaptable networks.

If you’re finding that your customers’ demands are changing at a rate that’s hard to keep up with, the time could be right to take a long, hard look at your distribution network.

Perhaps e-tail is already disrupting the way your customers operate, forcing them to change the way they integrate channels and hence, to amend sourcing strategies and impose new demands on you, the supplier.

Of course, if you’re part of a retail operation, the chances are you’re already embroiled in the turbulence of “anytime, anywhere” consumerism, in which case you won’t need anyone to tell you your distribution network needs some serious attention.

How to Act on Network Design Warning Signs

In a recent U.S. study, distribution network design emerged as the top priority of 72% of participating supply chain leaders, compared with just 6% in 2013.

The signs and symptoms outlined in this post are simply that—indications that your distribution network design needs to be reviewed and perhaps, realigned. The good news is that with the right people to help, network analysis can be a relatively painless process, compared with the days when spreadsheets were the only answer.

With the right people to help, network analysis can be a relatively painless process. Click To Tweet

In the hands of skilled analysts, today’s network modeling tools can run scenarios and illustrate network design options quickly and without the need for a major project, making regular network sense-checks a viable and valuable element of supply chain strategy.

Without modeling, the right way to adjust network design is rarely obvious, since there are typically a wide range of variables at play. A moderate investment on the other hand, to evaluate network alignment in the presence of certain signs and symptoms, can highlight small adjustments to make a big difference, and may even support the case for a complete network transformation.